How Financial Services Harness the Blockchain

Meet Internet 2.0, the Blockchain. It’s been around for less than ten years and already banks and other asset management firms are calling it a game-changer. Here’s how the blockchain drives change across multiple sectors in the financial services industry.

The most important facts to remember about blockchain is that it’s the most accurate, permanent database you can expect to encounter. Data inscribed, or encoded, on the platform is there forever.

The blockchain eliminates the need for middlemen since all records are replicated on each of the thousands of computers that share the network. This not only provides provenance but also, and more important, trust. The blockchain is super-fast. Its chain reaches all geographical locations, and the system saves large banks costs that range from $8 billion to $12 billion a year, according to the latest report by consultancy Accenture and benchmarking firm McLagan.

These benefits cut across the following sectors:

Banking

Banks know they’re slow, cumbersome, vulnerable to data hacking, battled by regulations (that change every 12 minutes), and assailed by digital disruption. among other factors. They battle terrific costs, spending between $60 million and $500 million on Know Your Customer (KYC) regulations and spend far more on transferring huge sums of money across national borders that take about two to five business days to arrive. Large banks know they need to innovate. How? The blockchain.

More than 40 major banks, which include Goldman Sachs, JPMorgan Chase, Citibank, and Bank of New York Mellon, have either accepted blockchain or plan to use it this coming year. In our standard banking world, the central banks manage the state’s currency, money supply, and general banking system of their respective countries. The blockchain knocks out this central authority and replaces it with a large network of computers that approve “blocks”, or transactions before they’re added to the “chain” of computer code. Cryptography is used to secure transactions, and each computer on the distributed network contains a copy of the record, making the system much harder to crack.

This displaces the need for middlemen, such as bankers, lawyers, notaries, and the like. There are no hold ups or bank robberies. Transactions are fast and inexpensive. In 2016, Digitalist Magazine found that a cross-country CAD 1000 (€667 EUR) blockchain payment that normally takes two to six business days to process took only 20 seconds. Today, it takes 10 seconds. Additionally, the magazine estimated that blockchain technology could save banks $20 billion a year in infrastructure costs alone.

Results? Banks have happier clients and a simpler more efficient process.

Insurance

Fraudulent claims, poor customer engagement, high costs with minimal profit, manual underwriting, slow process, high rate of errors, and fragmented data sources are just some of the issues that the standard insurance carrier endures. Along comes the blockchain that provides complete control, transparency and traceability for each claim. It alleviates high premiums and undercuts fraud by capturing the ownership claim of assets like gems, cars, homes, investments, inventions, and so forth.

The blockchain eliminates applications – all of them, not just paper-based documents. There’s no need for repetitive inspections – or audits for that matter – as assets are updated on the chain, this data is automatically distributed among relevant parties and encrypted to shield it from unauthorized access and to make it irreversible. The blockchain replaces certificates of insurance and saves you the need to solicit information like loss reruns of subrogation of claims. It’s all there on the ledger.

Financial planning

The wealth and asset management industry faces two huge problems: First, government regulations bind it too onerous KYC restrictions where they have to gather forms that include data on the client’s risk tolerance, tax situation, investments, financial needs, personal details (including identification numbers), employment status, annual income, net worth, investment objectives, and the like. The forms take anywhere from weeks to months to gather, review and file.

Second, wealth managers distribute the client’s investments assets over a variety of different platforms and most of these platforms withhold direct communication from their clients.

As regards the first problem, the blockchain resolves the issue by using one secure technology infrastructure. The client downloads the KYC forms to the blockchain and grants the wealth management firm access. The immutability and auditability of the chain helps the industry easily keep an audit claim for the client at less time, cost and errors that would otherwise be the case.

In the second case, the blockchain tells clients about portfolio changes and gives them more control over investments.

Blockchain technology has a number of potential use cases within the wealth and asset management lifecycle. They can be used to remove friction from the client onboarding process, streamline management of model portfolios, speed the clearing and settlement of trades, and ease compliance burdens associated with anti-money laundering (AML) and know your customer.

The result? The consultants concluded, “The client experience is enhanced, the process streamlined, and costs reduced.”

No wonder Harvard Business Review claims “Blockchain will do to the financial system what the Internet did to media”.

The technology is a game-changer.

Authors

Brian Samson is a CoFounder of True North, where he leads strategy, operations, and delivery. Prior, he was on the leadership team for 3X startup exits. He holds an MBA from UCLA Anderson School of Management.